Oxford capital eis fund
Investor Portal

Proof-based: phased investing to spread the risk

“No amount of initial research can substitute working closely with a company for 12-18 months.”

If start-up companies have a higher potential to fail, it follows that successful ventures investing in EIS schemes is dependent on finding winning companies with big ideas and backing them through their early growth stages.

Many EIS managers, motivated more by access to tax reliefs than risk-based investing for successful outcomes, invest as fast as possible, making single larger investments into each company they back.

At Oxford capital, we follow a different approach. Rather than making a large investment into newly identified opportunities right at start up stage, we invest only very small amounts of clients’ money in unproven companies. We will increase the investment only after achievement of specific growth targets. So we only take more significant risk with clients’ funds once companies have provided real or measurable proof of concept and actual earnings growth.

In effect, after our intensive research for identifying companies for small initial investments, we can then conduct much longer monitoring and continued due diligence as an investor at the table. No amount of initial research can substitute working closely with a company for 12-18 months.

For your clients, whenever they invest, their money will be invested across the spectrum – small holdings in earlier stage companies, larger holdings in proven companies.

This a key diversifier of risk in ventures investing.

Find out more in our guide to EIS.

Estimated reading time: 2 min

 

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    1. If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
  2. You are unlikely to be protected if something goes wrong
    1. Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.
    2. Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
  3. You won’t get your money back quickly
    1. Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    2. The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
    3. If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    1. Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    2. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest
  5. The value of your investment can be reduced
    1. The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    2. These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

 

If you are interested in learning more about how to protect yourself, visit the FCA’s website here.